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Planning for a proprietor or a freelancer, if it is to remain within the statute, is a matter of timing, classification and evidence. It is not a matter of omitting receipts or of describing household costs as professional costs. This article records the instruments the law itself provides — depreciation, the distinction between capital and revenue expenditure, the compliance calendar, and the deductions that remain available under the selected tax regime — and the limits that attend each of them.
An asset used for the profession — a computer, equipment, furniture, a vehicle used in the activity — is not deducted in full in the year of purchase. Depreciation is allowed at the rates prescribed for the block of assets. Claiming the entire price as a revenue expense in the year of purchase, where the item is a capital asset, is a common error. Conversely, failing to claim depreciation that is due is a failure to use a provision the statute has already written.
A professional who accounts on a cash basis is taxed on receipts of the year and deducts expenditure of the year. Advancing or postponing an invoice in order to manage a threshold — for example the turnover limit of a presumptive scheme — is a decision that must remain consistent with the contracts and with the method regularly followed. A sudden accumulation of invoices in April after a quiet March will invite the question whether the method has been followed consistently.
Advance tax is payable where the liability for the year is expected to exceed the statutory threshold. Tax deducted at source by clients must be reconciled with Form 26AS and with the annual information statement. Goods and services tax, where registration is required, is a separate statute and is not a substitute for income-tax compliance. Returns filed after the due date restrict the carry-forward of certain losses. These calendars are part of planning. They are not an afterthought for July.
A proprietor who has opted out of the older regime in circumstances the statute treats as binding may not be able to return to it. Before that step is taken, housing-loan interest, health-insurance premia and specified investments should be computed under both regimes, exactly as in the salaried profiles. Under the new regime, most chapter VI-A deductions are unavailable. Under the older regime they remain, within their limits. The computation should be prepared before the option is exercised, not after.
Clients who deduct tax at source do not relieve the professional of the duty to include the gross receipt in the return. The deduction is a prepayment of tax. The receipt remains professional income.
Imran, who practises as a consultant in Asansol, purchased equipment of ₹2.4 lakh in March and deducted the whole amount as an expense. The correct treatment was depreciation on the block. The revision increased the profit of that year and reduced the profits of the following years by the depreciation that then became available. Thereafter he maintained an asset register. The register is unglamorous. It is also the document that makes the claim sustainable.
For a proprietor, the quality of the books is itself a form of optimization. A deduction that cannot be demonstrated is a deduction that will not be allowed.
Treating tax deducted by a client as the only tax that will ever be due, and discovering advance-tax interest when the return is prepared.